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Prudential Financial (NYSE:PRU)

Q4 2013 Earnings Call

February 06, 2014 11:00 am ET

Executives

Eric Durant

John Robert Strangfeld - Chairman, Chief Executive Officer, President and Member of Executive Committee

Mark B. Grier - Vice Chairman

Robert Michael Falzon - Chief Financial Officer and Executive Vice President

Charles Frederick Lowrey - Head of Asset Management Business, Executive Vice President, Chief Operating Officer of US Businesses, Chief Executive Officer of Prudential Investment Management, President of Prudential Investment Management and Executive Vice President of Prudential Financial & Prudential Insurance

Edward P. Baird - Executive Vice President and Chief Operating Officer of International Businesses

Analysts

Yaron Kinar - Deutsche Bank AG, Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Jay Gelb - Barclays Capital, Research Division

Seth Weiss - BofA Merrill Lynch, Research Division

Erik James Bass - Citigroup Inc, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Prudential Financial Fourth Quarter 2013 Earnings Teleconference. [Operator Instructions] And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.

Eric Durant

Thank you, Cynthia. Good morning, and thank you for joining our call. Representing Prudential today are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, head of our U.S. businesses; Ed Baird, head of our International Businesses; Bob Falzon, Chief Financial Officer; and Peter Sayre, Controller and Principal Accounting Officer.

We'll start with prepared comments and then we'll answer your questions. In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled Forward-Looking Statements and Non-GAAP Measures of our earnings press release for the fourth quarter of 2013, which can be found on our website at www.investor.prudential.com.

In addition, this presentation may include references to adjusted operating income or to earnings per share or EPS or return on equity or ROE, which are determined based on adjusted operating income. Adjusted operating income is a non-GAAP measure of performance of our Financial Services businesses that exclude certain items. Adjusted operating income is not a substitute for an income determined in accordance with Generally Accepted Accounting Principles, GAAP, and the excluded items are important to an understanding of our overall results of operations. For a reconciliation of adjusted operating income to the comparable GAAP measure, please see our earnings press release on our website. Additional historical information relating to the company's financial performance is also included on our website. John?

John Robert Strangfeld

Thank you, Eric. Good morning, everyone. Thank you for joining us. Now that we've closed the books on 2013, I'd like to kick things off with some high-level comments regarding the year as a whole.

First, earnings. Earnings per share were at $9.67 compared to $6.40 per share for 2012 based on adjusted operating income of the Financial Services businesses. This is an increase of 51%. Excluding the significant items we disclose each quarter, such as DAC unlockings and business integration costs, the EPS increase would be 33%. Our results reflect strong organic growth across our businesses, coupled with pricing discipline and effective expense and risk management.

In addition, the successful execution of the Star and Edison acquisitions in Japan, the emerging success of The Hartford Life purchase and the addition of the large pension risk transfer deals we closed in late 2012, all contributed meaningfully to this year's earnings.

And while our businesses are performing exceedingly well, we've also been helped by healthy tailwinds. As we have said recently, the things that tend to fluctuate generally fluctuated in a positive direction in 2013. In particular, we benefited from strong income from non-coupon investments, especially in our Retirement business in the Gibraltar; from favorable mortality, especially in Individual Life; and from good case experience in Retirement.

Turning to return on equity. It was in 2010 that we set out an ROE goal of 13% to 14% for 2013. We believed then, as we do now, that achieving and sustaining the 13% to 14% represents superior performance relative to our peers. As you can see, we exceeded the top end of our stated ROE objective. This reflected our strong underlying business performance, the noteworthy step-function changes made possible by M&A and outsized organic, as well as the tailwinds I mentioned earlier.

That said, 2013 is behind us and we're looking forward. We've never hit our goal as a 1-year, once-and-done objective. On the contrary, our goal is to sustain an ROE of 13% to 14% over a full cycle. And we believe achievability of that is made possible by the quality and mix of businesses, our approach to capital management and most importantly, the quality of our people.

I'll close with a few comments on Prudential's financial strength. The capital position of our U.S. and Japanese insurance companies continue to meet the high standards we managed them to, we believe AA, as you will hear from Rob Falzon shortly. We also have the capacity to remain strongly capitalized even in stressed environments. We've lowered our ratio of capital debt to total capitalization within our targeted range, and diversification of our risk profile has been a priority. The pension risk transfer transactions added significant longevity risk to our profile, other examples include an innovative annuities product that offers retirement income solutions without linkage to equity markets and greater emphasis on non-guaranteed universal life products in Individual Life.

And finally, the quality of our investment portfolio has never been better. With this strong financial position, we are able, over time, to deploy capital in a way that supports a healthy blend of normal organic growth, outsized organic such as pension risk transfer, M&A such as Star and Edison and Hartford, and returns to shareholders such as the $750 million of share repurchases and $800 million of common stock dividends in 2013. We cannot tell you the precise composition of those elements in any specific timeframe, but we think over the long haul, it has been balanced and appropriately supportive of both our strategic and our financial objectives.

And with that, I'd like to turn it over to Mark.

Mark B. Grier

Thank you, John. Good morning, good evening or good afternoon, whatever the case may be. Thank you for joining our call today. I'll take you through our results for the quarter and then I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture. I'll start with an overview of our financial results for the quarter, shown on Slide 2.

On a reported basis, common stock earnings per share amounted to $2.20 for the fourth quarter, based on after-tax adjusted operating income of the Financial Services businesses. This compares to EPS of $1.76 a year ago. After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was up 31%, amounting to $2.22 compared to $1.69. On that basis, pretax earnings for our operating divisions increased by 41% for the quarter. Nearly 1/2 of this increase came from organic growth in the base of account values and assets under management, driving higher fees in our U.S. businesses. In addition, lower expenses in several businesses reflect non-recurring costs we incurred a year ago. The remainder of the increase came mainly from a greater contribution from investment results in our retirement business, driven largely by the pension risk transfer business we put on the books late in 2012 and bolstered by exceptionally strong current quarter returns from non-coupon investments; the contribution of the business we acquired from Hartford through our Individual Life results; and finally, by continued growth of our international Insurance business, which also benefited from lower expenses, including cost synergies as the Star and Edison integration is now essentially complete.

On a GAAP basis, we reported a net loss of $427 million for the current quarter. This reflects the accounting impact of foreign currency remeasurement of non-yen liabilities on the books of our Japanese insurance companies, reflects losses on sales of lower-yielding securities from portfolio repositioning and reflects negative mark-to-market on derivatives we used in duration management driven by rising interest rates. The comparison of book value per share, excluding accumulated other comprehensive income, or AOCI, is affected significantly by the geography mismatch from asset and liability changes due to foreign currency fluctuations, where the impact on non-yen liabilities runs through the income statement while the offsetting impact on the assets is included in AOCI rather than net income. After adjusting the numbers to remove the impact of this mismatch, book value per share is $59.99 at year end, up $1.91 from a year ago after payment of dividends totaling $1.73 per share.

As we've told you, we also evaluate our ROE performance in relation to our goals after adjusting for this accounting geography mismatch, which benefited our reported ROE by reducing the denominator. After removing this benefit, along with the net benefits to results for market-driven and discrete items, our ROE for the year 2013 would be about 15%, reflecting solid underlying performance across our businesses with tailwinds including a strong contribution from non-coupon investment results, favorable life mortality and favorable retirement case experience.

Slide 3 presents a rundown of the short list of market-driven and discrete items included in our results for the quarter. In the Annuities business, improving fixed income returns for our separate account funds and the equity market increase in the quarter caused us to release a portion of our reserves for guaranteed minimum death and income benefits and led to a favorable DAC unlocking, resulting in a benefit of $0.14 per share.

Going the other way, based on an internal review, we strengthened reserves in our International Insurance Life Planner business for a group of policies that came to us in an acquisition a number of years ago. In Gibraltar Life, we recorded reserve true-ups mainly in connection with an update of a policy administration system that is now essentially complete. Together, these reserve refinements amounted to a charge of $0.14 per share. In addition, charges for integration costs in the quarter totaled $0.02 per share. In total, the items I just mentioned had a net unfavorable impact of just $0.02 per share on fourth quarter results.

During the year-ago quarter, market-driven and discrete items produced a net benefit of $0.07 per share. In addition, results for the year-ago quarter included expenses that we estimated to be above a baseline level for items such as bond start-up costs and business process improvements with the negative impact of about $0.14 per share, about 1/2 of which was offset by a favorable catch-up in our effective tax rate for the quarter. The outsized expenses in the year-ago quarter contributed to favorable current-quarter expense variances in some of our businesses, which I will cover in a few minutes.

On Slide 4, you see a view of our ROE trend with the underlying earnings performance. In order to show a trend that is indicative of our business results, the earnings per share and ROE we displayed here are based on after-tax adjusted operating income, excluding the market-driven and discrete items we've identified in our earnings releases. In addition, we've excluded the impact on ROE of foreign currency remeasurement that affects our book value through net income.

Our earnings per share on this basis grew at a compound rate of about 20% over this period, roughly the same as our reported EPS and drove the ROE expansion. While rising equity markets and the tailwinds in 2013 that I mentioned contributed to our results, the main drivers of this progression were: Continued organic growth, the successful integration of the Star and Edison businesses we acquired in 2011, the pension risk transfer transactions we closed in late 2012 and the contribution of the Individual Life business we acquired from Hartford in early 2013.

Turning to Slide 5. On a GAAP basis, the net loss of $427 million for the Financial Services businesses in the fourth quarter includes amounts characterized as net realized investment losses of $2.4 billion pretax, comprised of the items you see here. Foreign currency remeasurement losses primarily represent changes in the value of non-yen liabilities relating to products denominated in U.S. dollars and other currencies on the books of our Japanese companies where the functional currency is the yen. The yen weakened in the fourth quarter, causing us to record a loss in the income statement because it would take more yen to pay off these foreign currency liabilities. We consider this noneconomic because the liabilities are matched with assets in the currencies in which they will be settled. The income statement loss results from the accounting geography mismatch that I mentioned.

Product-related embedded derivatives and hedging activity had a negative impact of $193 million in the quarter. The current quarter pretax loss also included $342 million from negative mark-to-market on derivatives, mainly related to asset liability duration management and largely driven by rising interest rates. The realized losses of $573 million in the quarter for general investment portfolio activities were driven largely by bond sales. We took advantage of market conditions to reposition our general account investments and the interest rate-driven losses on the securities we sold allowed us to monetize tax benefits. Impairments and credit losses on investments were $48 million in the quarter.

Moving to our business results, and starting with Slide 6. Slide 6 shows our U.S. Retirement Solutions and Investment Management businesses with a view of the results of these businesses and the adjustments we would make for market-driven and discrete items to get a view of underlying performance relative to a year ago.

Slide 7 highlights annuities. After adjusting for market-driven and discrete items, which include unlockings and experienced true-ups in each year and a software write-off in the year-ago quarter, annuity results were $384 million for the quarter, an increase of $128 million from a year ago. Stripping out the impact of market-driven and discrete items, as we've done on Slide 8 in the gold bars, the trend of earnings from the Annuities business had outpaced our account value growth over the past year. Account values passed the $150 billion milestone, reaching $154 billion at year-end, up 14% from a year ago. The increase was mainly driven by market appreciation, with gross sales for each of the past 3 quarters at just under $2.5 billion. The rising account values drove a 16% increase in policy charges and fees compared to the year-ago quarter and have reduced our estimate of the perspective cost of guaranteed death and income benefits associated with our contracts. In addition, the improvement to our gross profits have contributed to a more favorable DAC amortization rate. Current-quarter results also benefited from lower expenses, reflecting the inclusion in the year-ago quarter of $17 million of costs that we estimated to be above a baseline level for items including business process improvements in areas such as technology and back-office functions.

Shown on Slide 9, our gross annuity sales for the quarter were $2.4 billion, in line with this year's second and third quarters but down from $3.8 billion a year ago. We regard our level of sales as an outcome rather than a target and we've taken a number of actions over the past year to adapt our products to the current environment in order to maintain appropriate return prospects and improve our risk profile. With the introduction last February of our current living benefit feature called Highest Daily Income, or HDI 2.1, we reduced the income payout rates at various age bands and eliminated the guaranteed doubling of protected withdrawal value after 12 years, while leaving writer charges unchanged. In addition, we have withdrawn our x shares or bonus products, we have suspended acceptance of subsequent premiums in generations of products offered before 2011 and we've implemented a cap on subsequent purchase payments on more recent HDI products. We've also reduced the commissions we pay.

We've also taken steps to enhance our product portfolio, allowing us to broaden the choices we can offer to retirement-focused clients and their advisers while diversifying our risk exposure. We have brought to the market a product we call Prudential Defined Income, or PDI, which directs a client's entire investment to a multi-sector fixed income investment portfolio. PDI provides a guaranteed lifetime income amount, which is determined by applying an income payout rate based on the client's age at time of purchase to the premium the client pays. The payout percentage grows at a contractual roll-up rate until lifetime withdrawals begin. The product design allowed us to change both the income payout rate and the roll-up rate for new business on a monthly basis, enabling us to keep pricing in sync with changing market conditions. PDI has begun to meaningfully contribute to our sales mix accounting for about $450 million, or just under 20% of gross sales for the quarter, growing from about $250 million in the third quarter as more investment professionals have become familiar with the product's value proposition and additional distributors have signed on to include it in their platforms.

Slide 10 highlights Retirement. The Retirement business reported record-high adjusted operating income of $295 million for the current quarter. This compares to $147 million a year ago after adjusting for a $78 million benefit included in the year-ago results from the recovery under a settlement of losses we have recorded in 2007. Excluding this recovery item, earnings were up $148 million from a year ago.

Third quarter results benefited by $112 million from a greater contribution from net investment results. This includes about $55 million of returns that we would consider above our average expectations on non-coupon asset classes. The remainder of the increase came mainly from higher fees driven by account value growth and the greater contribution from case experience reflecting the pension risk transfer business that came on the books in late 2012.

Turning to Slide 11. Total retirement gross deposits and sales were $9.9 billion for the current quarter compared to $43 billion a year ago, which included $33.6 billion for the GM and Verizon pension risk transfer transactions. Standalone institutional gross sales amounted to $4.1 billion in the current quarter compared to $5.6 billion a year ago, excluding the GM and Verizon transactions. Third quarter sales included $3.2 billion of stable value wrap products while the year-ago quarter included $5.3 billion of those sales. We are beginning to see greater competition in the market for these products with a decrease in the number of wrap providers. Full service gross deposits in sales were $5.8 billion for the quarter with 5 case sales of over $100 million, including a major case win of $1.2 billion. This compares to a total of $3.9 billion a year ago. Net flows were positive for the quarter. Total retirement net flows for the quarter amounted to $1.4 billion and account value stood at a record high $322.9 billion at year-end, up $33 billion from a year ago.

Slide 12 highlights asset management. The asset management business reported adjusted operating income of $209 million for the current quarter compared to $185 million a year ago. Results for the year-ago quarter included a $41 million benefit from the sale of a real estate-related investment that you see here as a market-driven and discrete item. The absence of this year-ago benefit led to a $32 million lower contribution in the current quarter from what we call, other related revenues, which encompasses incentive, transaction, strategic investing and commercial mortgage activities. While most of the segment's results come from asset management fees, the contribution from these activities is variable in nature since it reflects changing valuations and the timing of transaction. The increase in earnings for the asset management business was mainly driven by higher asset management fees reflecting growth in assets under management. The segment's assets under management amounted to $870 billion at year end, up 5% from a year ago, reflecting about $24 billion of net positive institutional and retail flows over the past year. Results also benefited from lower expenses associated with asset management activities reflecting costs we incurred a year ago that we estimated to be in excess of a baseline level including those associated with the launch of the closed-end mutual fund.

Turning to Slide 13. Here are the results of our U.S. Individual Life and Group Insurance businesses showing the adjustments to Individual Life results for integration and transaction costs related to The Hartford acquisition and an adjustment to the group insurance results a year ago for an increase in legal reserves.

Slide 14 highlights Individual Life. After adjusting for market-driven and discrete items, Individual Life reported earnings of $165 million for the current quarter, up $51 million from a year ago. The increase was driven by the contribution of the in-force block of business we acquired from Hartford. The business integration is well on track. We are now benefiting from a unified distribution system, drawing on Hartford's strength in financial institutions and our solid positioning in the brokerage general agency channel. As planned, we transitioned to an integrated product portfolio as of the beginning of this year and cost synergies are continuing to emerge in line with our expectations. Mortality was favorable in comparison to our average expectations, both in the current quarter for the acquired Hartford business, as well as the legacy Prudential business, and in the year-ago quarter. Including reserve requirements, this contributed about $30 million to current-quarter results.

Moving to Slide 15. Individual Life sales, based on annualized new business premiums, amounted to $166 million for the current quarter, including $69 million from the third-party distribution partners that came to us with The Hartford acquisition. This compares to total sales of $144 million a year ago.

Guaranteed universal life sales for the quarter amounted to roughly $80 million, essentially unchanged from a year ago when we did not yet include the Hartford distribution system. We've taken actions to limit concentration in these products and to maintain appropriate returns, including a series of price increases most recently this past October. And we've implemented a cap on the amount of premium a client can invest when purchasing a contract. These actions have contributed to the decline in our overall sales level from the first 2 quarters of 2013. Current-quarter sales of universal life without secondary guarantees, shown in the gold bars, contributed $27 million to current-quarter sales, up $20 million from a year ago. This type of product has been popular among clients of the distributors who came to us with The Hartford acquisition. And we've carried the best features of The Hartford product portfolio into our integrated product portfolio through our Prudential Founders Plus product that we launched a few weeks ago.

Slide 16 highlights group insurance. Group insurance earnings amounted to $58 million in the current quarter compared to $8 million a year ago after adjusting for the charge to increase legal reserves. The $50 million increase reflected improved claims experience in group life with a lower claim count in the current quarter and in group disability where we had a greater benefit from claim resolutions.

Turning to Slide 17. Slide 17 shows the results of our International Insurance business adjusting for reserve refinements in the current quarter and for integration costs.

Slide 18 highlights our Life Planner operations. After adjusting for market-driven and discrete items, our Life Planner business reported earnings of $381 million for the quarter, up $49 million from a year ago. The increase was mainly driven by continued business growth. On a constant dollar basis, insurance revenues, including premiums, policy charges and fees, were up by 7% from a year ago. Foreign currency exchange rates, which reflect our hedging of yen income at JPY 80 for 2013 versus JPY 85 in 2012, contributed a benefit of $11 million to earnings in comparison to a year ago.

Slide 19 highlights Gibraltar Life. After adjusting for the items I mentioned, Gibraltar Life reported earnings of $378 million for the current quarter, up $53 million from a year ago. The current quarter benefited from a contribution from investment results about $20 million greater than a year ago, with the increase mainly driven by our yen-based fixed income portfolio. Third quarter results also reflected lower expenses including additional cost savings from the Star and Edison business integrations. With the integration process now essentially complete, the $250 million of annual cost saves that we had targeted has been substantially achieved on an annualized run rate basis. Current-quarter results for Gibraltar also benefited by $10 million in the comparison from foreign currency exchange rates.

Shown on Slide 20, International Insurance sales on a constant dollar basis were $742 million for the current quarter compared to $1.1 billion a year ago. Our international sales pattern is affected by: Market developments; seasonality, which favors the first and second quarters; and by actions we've taken such as repricings. Gibraltar's yen-based Bank Channel Single Premium Whole Life product contributed $419 million to sales in the year-ago quarter, marking the crest of a sale surge that followed market developments earlier in 2012. In order to limit our concentration in the product and maintain appropriate returns, we implemented crediting rate reductions and reduced commissions effective at the beginning of 2013. And we recently discontinued sales of this product. The decline in sales of this product in the current quarter compared to a year ago more than offset an overall increase of $76 million or 12% for the remainder of our international insurance product portfolio.

Moving on to Slide 21. Life Planner sales were $314 million in the current quarter, up $38 million or 14% from $276 million a year ago. As you see in the dark blue bars, more than 1/2 of the increase came from Japanese yen-based products, including a retirement income product where a pending change in commission rates contributed to accelerated sales. Sales of U.S. dollar-denominated whole life and retirement income products shown in the gold bars are essentially flat from a year ago. Changes in currency rates have made products that are denominated in U.S. dollars more expensive to Japanese consumers in yen terms, making yen-based products relatively more attractive. Fourth quarter sales in our Life Planner operations outside of Japan were up $14 million from a year ago. The increase came mainly from Brazil where we are growing our Life Planner force and from Korea.

Slide 22 presents the sales trend in Gibraltar. Sales from Gibraltar Life were $428 million in the current quarter compared to $785 million a year ago. Taking a look at the gold portions of the bars, you can see a $344 million decline in sales through the bank channel. This reflects a $395 million decrease in sales of the single premium yen-based product that I mentioned, with the current quarter including a small amount of residual sales. Sales of other products through banks increased by $51 million, mainly driven by recurring premium death protection policy. Sales by life consultants are down $21 million from the year-ago quarter. Over the past year, the life consultant count has declined by about 2,000 to roughly 9,300 life consultants at year end, which is consistent with our expectations as we implemented minimum production requirements and other Prudential standards for the sales force that came to us with the Star and Edison acquisition. The impact of this decline in headcount was largely offset by an increase in productivity in terms of policies sold per life consultant per month, contributing to more cost effective distribution. Sales by independent agents, which are mainly in the small business market, are up by $8 million from a year ago.

Slide 23 shows corporate and other. Corporate and other operations reported a loss of $397 million for the current quarter. This compares to a $303 million loss a year ago after adjusting for market-driven and discrete items, which included charges to increase our reported liabilities for employee benefits and to write off bond issue costs. The increase in the loss reflects higher expenses in the current quarter including nonlinear items such as compensation programs that are based on our performance for the year. This result includes the impact of a one-time special recognition program covering our broad employee population, excluding senior management. The impact of this program amounted to $0.09 per share in the quarter.

Now I'll turn it over to Rob Falzon.

Robert Michael Falzon

Thank you, Mark. I'd like to give you an update on some key items under the heading of Financial Strength and Flexibility.

Starting on Slide 24. We continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards. For Prudential Insurance, we manage to a 400% RBC ratio, which we believe gives us some cushion against our AA objective. We began the year with an RBC ratio of 450%, a little above. While statutory results for 2013 are not yet final, we estimate that RBC for Prudential Insurance as of year-end 2013 will continue to be above 450%.

In Japan, Prudential Japan as Gibraltar Life reported strong solvency margins of 757% and 980%, respectively, as of their most recent reporting date, September 30, 2013. These are comfortably above our 600% to 700% targets, and we expect that our Japanese companies will continue to report strong solvency margins relative to their targets as of the end of their current fiscal year, which ends March 31 of this year.

Looking at the overall capital position for the Financial Services businesses on Slide 25. We calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% RBC ratio target, and then add capital capacity held at the parent company and other subsidiaries. At the end of 2012, prior to funding the Hartford Life acquisition, our on-balance sheet capital capacity was roughly $3 billion, of which $1.5 billion to $2 billion was readily deployable.

During the year, we funded The Hartford acquisition; declared 4 quarterly common stock dividends totaling about $800 million, including a dividend of $0.53 a share in the fourth quarter that represented a 33% increase; and repurchased $750 million of common stock totaling $2.3 billion of capital deployment and returns of capital. These capital uses were more than offset by excess capital generated within our businesses, primarily from operating earnings.

The net result is that we ended the year with on-balance sheet capital capacity of about $3.5 billion, including about $1.5 billion that we consider to be readily deployable, consistent with where we stood at the end of the third quarter.

Turning to the cash position of the parent company. Cash and short-term investments, net of outstanding commercial paper, amounted to about $4.2 billion as of year end. The cash in excess of our targeted $1.3 billion liquidity cushion is available through repayment or in debt to fund operating needs and to redeploying over time. As you may have seen, in November, we issued $1.5 billion of trust securities without bringing debt onto our balance sheet or cash into the parent company. This transaction enhances our financial flexibility by providing a discretionary source of funds that can be accessed at any time over the next 10 years regardless of capital market conditions.

Now I'll turn it back over to John.

John Robert Strangfeld

Thank you, Rob. Thank you, Mark. And we'd like to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Yaron Kinar with Deutsche Bank.

Yaron Kinar - Deutsche Bank AG, Research Division

First question I have goes to the book value per share and using the adjusted metric for foreign currency, it seems like it's a little flat. And I know you've spent some time in the past talking about the sensitivities coming from the embedded derivatives portfolios, but not boss [ph] at the end of the day, how do we see that number growing? What would lead to that? You look at 2013 really being a record year in terms of earnings and yet book value remains flat.

Robert Michael Falzon

Yaron, it's Rob Falzon, let me try to respond to that. First, let me put into perspective sort of that movement in book value. So adjusting for the FX remeasurement as we do when we report book value, the number grew year-over-year by just under 3.5%. Now there are a couple of notable noneconomic GAAP charges that don't help in the growth of our book value. Notably, this quarter and for the year, I would say that if you looked at the NPR, there was a fairly dramatic decline in that from the beginning of the year to the end of the year, about $2.50 a share. If you adjust simply for that change in NPR, we would have grown book value by close to 7% -- a little over 7.5% from year-end last year to year-end this year. Furthermore, as you know, we paid dividends and absent having paid those dividends, our growth rate and book value per share would have been close to around 10.5%. So I think if you look at the economic book value from year-end last year to year-end this year, it actually represents a very healthy growth rate. We have very little control over GAAP accounting. And so I think what I can hold out for you is that the NPR that sits on the balance sheet is not a very material number today although, obviously, that can move in different directions. We continue to look at the growth of book value x FX remeasurement and look to net out some of these noneconomic impacts on our book value. There are other non-GAAP measures that enter into there which would support an even higher growth than that, but those are the ones that are obvious and we adjust for those economically when we evaluate that growth rate.

Mark B. Grier

This is Mark. Let me just add that as we use the term noneconomic, you should be thinking that over time this will come back. And it's hard to predict exactly when, but as Rob uses the term noneconomic, we sort of think of it as things that will wash out over time. It may be over a long time, but we anticipate that those things will not be biased one way or the other in the longer run.

Yaron Kinar - Deutsche Bank AG, Research Division

Okay. And then switching gears to the individual annuities sales, do you have any target in mind regarding the new PDI product, what percentage of sales you want it to be or what percentage of account value?

Charles Frederick Lowrey

It's a good question, and the answer is, not really, but let me explain that. I think one of the strategies we've had with annuities is to -- is a diversification strategy. And if you look at what we've done and what we've filed over the past quarter, we're filing a new HD products, we've come out with PDI, we filed for a non-guaranteed product. So we're really going from a one-product shop to a multi-product shop and that's to diversify risk over time. So we're very pleased with the take-up of PDI, which represented about 20% of sales in the fourth quarter. And we would expect that might grow a little bit more over time. We'll wait and see as we gain traction and more distributors. But it's part of a larger strategy, which is to diversify the product mix over time.

Yaron Kinar - Deutsche Bank AG, Research Division

Okay. And does that diversification add to rising interest rate risk at least on the, on an accounting basis?

Charles Frederick Lowrey

No, we don't think so. So specifically with PDI, which is a fixed income product, the duration of the assets are less than the duration of the liabilities. So when interest rates rise, we'll get a better yield on assets over time. And the present value of which should be greater than any value degradation in the bond portfolio. So in this particular product, we don't think so. And as we go forward with non-guaranteed products and other products, we think that the diversification of all these products when put together will lower the risk profile of the Annuities business overall.

Operator

Our next question comes from the line of Tom Gallagher with Credit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

First question is on Japan. Can you comment a little bit, if we peel back the onion, whether or not the quarter's results being a bit weaker sequentially is related at all to margins that you're seeing on any of the single premium products, and how that will compare to the traditional products? Whether you're seeing any differentiation there or are we really just seeing the seasonally higher expenses that should largely reverse as you head into 1Q? That's my first question.

Edward P. Baird

Tom, this is Ed Baird. Your second option is the winning option. There really is nothing material going on in terms of a shift in the margins of the products. It really has to do with the seasonality and that's one of the reasons we try to deemphasize the merits of sequential comparisons and look more at the year-over-year comparison, where, I'm sure you've noticed, the results are far more positive. There were a number of sort of one-off positives in the third quarter and some one-off negatives in the fourth quarter, which when combined, made for a more dramatic comparison. But no, I don't see anything changing in terms of the margins of the products. If anything, there may be a slight strengthening taking place. For example, you mentioned the bank products. As you know, that's a product that is more susceptible, particularly the single premium, on its margins, to what's going on in interest rates. And that's one of the reasons we started almost a year ago to lower the crediting rate, to lower the commissions and ultimately ended up shutting down the product because we weren't comfortable with the margins in that product were going to satisfy in our current environment, our target ROEs. So no, there's no material change taking place, it's more a matter of the seasonality quarter-to-quarter.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

So Ed, suffice to say, and this is going to be kind of a crude way to calculate it but I just want to understand directionally, if I took 3Q and 4Q, added them, divide it by 2, that's roughly speaking what we should expect on a trend rate here?

Edward P. Baird

Well, I want to be careful about giving you any kind of forecasting methodology, particularly something as appealingly simple as the one you've just provided. But I do you think you're in the right direction by saying that some of what transpired in the third quarter was probably overly positive, in particular areas like the non-coupon investment whereas we pointed out at that time, I think the returns in that quarter were about $69 million. In this quarter, it's at $33 million. We took those 2, define the average, my hunch is an 89-er [ph]. But on that specific point, probably this quarter, it's closer to indicative than the third quarter. That's just one of the factors, but as you know, that was a relatively material factor in terms of explaining some of the differences Q-over-Q.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Understood. And then just one other question on, if you can comment at all on emerging regulations, whether it's non-bank SIFI, G-SIFI, Comm Frame, and whether or not the things that are emerging on that changes your view on which businesses you want to emphasize going forward, in particular, variable annuities, any changes or altering of views there?

Mark B. Grier

This as Mark. As you know, there are a lot of moving parts in the regulatory arena. You listed the big ones. And I would say that we have an agenda that's independent of regulation around issues like diversification that Charlie discussed and the strength of our balance sheet and enhancing some of our risk management capabilities, for example. And I believe that the things that are high on our list of priorities are also probably complementary to the kinds of things that regulators would be interested in. But I wouldn't say that we, at this point, have targeted any specific products for regulatory reasons. As I've said before, we believe that we're well run, that our risk and capital measurement processes are robust and will stand up to the scrutiny of the various regulators that we have to deal with. So there's a context maybe that's a little more local but that's probably also aligned.

Operator

Next we'll go to the line of Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

I wanted to go back to the Annuity business for a second, specifically on Slide 8. And you made a comment in your prepared remarks that the growth rate in fees has been much stronger than the growth rate in account value. And I just wanted to drill down into that a little bit more, try to understand what the underlying drivers are.

Charles Frederick Lowrey

Sure. I think part of this is a scale issue. So in other words, as we have grown the business, the fees have grown and therefore the margins have grown. I also think that we have been very focused on expenses as well. And therefore, as a result, the margins have grown and our return on assets are remained, I think, relatively high at about a hundred, about 1 0 1. Right? 1.01%. So that's also affected a little bit by the K factor coming down. So I think it's partly scale, I think it's partly a focus on expenses and partly focused on -- or a result of the K factor as well.

Suneet L. Kamath - UBS Investment Bank, Research Division

Is there another phenomenon playing here which is, I believe you charge your writer fees based on the protected amount, and with your highest daily feature, that protected amount, in theory, will go up pretty consistently. So is that playing in here as well or are those fees taken below the line to offset the cost of hedging?

Mark B. Grier

Suneet, it's Mark. I was going to mention that as a marginal impact, that methodology applies to the relatively more recent products that we've sold. So that may be in there somewhere but it wouldn't be among the biggest items. As Charlie said, there's operating leverage in this business.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay, got it. And then as we think about the operating leverage going forward and your sales -- your flows, I guess for the past couple of quarters, being fairly close to 0, I guess, a couple hundred million, should we still expect that this business will produce pretty strong earnings growth absent whatever happens in the equity market?

Charles Frederick Lowrey

We can't make forward-looking statements, but I think what we can say is that we're extremely pleased with the profitability of that which we are selling now. And all things being equal, that should lead to growth in earnings going forward.

Suneet L. Kamath - UBS Investment Bank, Research Division

Got it. And then just my other question, I guess for Mark, is on the pension risk transfer business. You've obviously done some deals over the past couple of years and I think you've funded them with essentially internal capital. Based on your capital position today, if another Verizon-type deal comes along of that size, do you think you'd be able to fund that with internal capital?

Mark B. Grier

I'll let Rob answer that.

Robert Michael Falzon

Yes. Suneet, it's Rob. Yes, we feel we're -- the numbers I threw in front, I think we have adequate capacity in order to do similarly sized pension risk transfer or transactions on a prospective basis without going outside.

Suneet L. Kamath - UBS Investment Bank, Research Division

Right. And that pertains to Verizon. If something even bigger, GM size, came along, would that still apply?

Robert Michael Falzon

We would have the capacity to do a similarly sized transaction, yes.

Operator

Our next question comes from the line of John Nadel with Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

I have just a couple of quick ones. On the group results, Charlie, I know in the prepared remarks that Mark indicated that mortality and morbidity experience had improved, but I do believe that was a year-over-year comment. I'm more interested in whether you think, as a result of the repricing efforts, that the current quarter results are more indicative of a sustainable recovery there?

Charles Frederick Lowrey

Yes, John, it's Charlie. I would say that you need to be careful there. That if you look at fourth quarter results, and we'll talk about life and then if you want to talk about disability, we can do that. But in terms of life, there's a high degree of seasonality here. So if you look at our benefit ratio this quarter of 86.3%, that's below the range of 88% to 92%. But if you look back to 2012, we were at 86% as well. So the fourth quarter usually is the best quarter for us and the first quarter tends to be far worse than that just by virtue of what happens. So I'd be careful and not project forward in that fashion.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes, I should have mentioned. So taking into account the seasonality of the business, maybe it's just an overall question as to where are you relative to your targets against sort of repricing and recovery of margins overall for this business? Let's take the quarter out of it.

Charles Frederick Lowrey

Okay. Fair enough. I think what I'd say is we're pleased with the process but we're 2 years into a multiyear process, multiyear being defined as kind of 4-ish years, right? So if you look at it from that perspective, I think there's a way to go, but we're pleased with the process. The only other thing I'd say is that it isn't going to be linear, right? There will be ups and downs but if you look at a 4-quarter trend, I think both in disability and to a certain extent, life, you see a positive trend.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

And then, Mark, just a question on the corporate expenses in 4Q, I think you indicated that $0.09 was essentially this one-time special risk [ph] recognition-related comp. I'm just curious, why didn't you call that out in the press release last night? I mean, my sense is the stock is pressured today, at least in part, because of a perception that earnings power had sort of declined a bit. I think if you make the adjustment for this item, it really changes perception.

John Robert Strangfeld

John, this is John. Let me just respond to further embellishing upon what it was. The journey we've taken from a 10% ROE in 2010 to 14%-plus in 2013 has been made possible by a whole lot of people, management, but also many folks in the rank-and-file. And that broad-based group of rank-and-file are people who do not participate in our long-term comp programs or other types of equity programs. And so what we concluded and what the board was supportive of is we needed to do something specific to recognize the efforts of these men and women who have been so extraordinary over the course of this journey. That prompted us to do an accrual in the fourth quarter. And it also -- and the order of magnitude of that, as Mark referenced, is around $0.09. The specifics of that actually haven't even been announced to the employees themselves, so we're a little bashful about how much we say about that but we concluded we should make a reference to that today.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes. And like I said, I'm certainly not questioning whether it's deserved or not. Your results over the last couple of years have been terrific. I'm just trying to understand why it wasn't necessarily called out. Because, again, I just think it changes the perception of your quarterly results overall.

Mark B. Grier

This is Mark. I think it does in that respect particularly relative to headlines and we appreciate those comments. We're just in a situation where we have a little more communication that we need to work through and we're in that process, but your point is well taken.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Got it. Okay. And last one, real quick for Ed, just -- and I may have these numbers wrong. If I exclude the bank channel, and maybe that's the problem, I shouldn't exclude the whole bank channel, for Gibraltar, it looks like sales on a year-over-year basis fell. Am I looking at that right or should I not be excluding the whole bank channel?

Edward P. Baird

No, you're absolutely right, John. First, you can do it in a 2-step process. One, exclude the bank for the reasons we discussed, which is that we shut off the single premium yen product for the reasons of the margins that we talked about. And unfortunately, even with that, when you cut that out, the bank sales went up because they shifted over to the recurring premium. So if you cut out, and I think this is maybe inferrable somewhat from, I don't know what slide page -- is it Slide 22? What you'll see is that part of the sales that have been going to the lower-margin single premium shifted over to the higher-margin recurring premium whole life, so that's the first step. The second step is exactly as you've said, to look at the purer Life Consultant business. And it's completely appropriate to drill down as you're starting to, because if you look at the service number, the drop in sales is around 18% or 19%. But we actually feel pretty good about that because -- excuse me, the drop in the sales is more like 9% or 10%, and that's good because the headcount dropped by around 18% or 19%. In other words, what we've got is an 18% drop in headcount, only about half that drop, about 9% in sales. And the reason it didn't drop as much is because the productivity has gone up by about 13%, which is exactly what we're after. This is a model you recall we followed with Kyoei so successful 10 years ago, it's the same model we're following here. We will continue to put in place mechanisms that require people to produce at the level that we want. And until then, you'll see drops in headcount. I would suggest that we may be approaching that stability point because this is a quarter in which sequentially, we roughly stabilized and had a slight increase in headcount.

Operator

And our next question comes from the line of Jay Gelb with Barclays.

Jay Gelb - Barclays Capital, Research Division

Mark, on the non-bank SIFI topic, would you agree that the insurers are gaining traction, no argument that the capital requirements of insurers were different from the banks and when we might ultimately get some clarity on that issue?

Mark B. Grier

Well, on the question on when we may get clarity, I'd say it's very much work in process, and I wouldn't forecast that. I have felt all along that the conversations around capital have generally been constructive. And I do think that the insurance industry is at least being listened to and we continue to believe that when the dust settles, we will have a capital regime that works.

Jay Gelb - Barclays Capital, Research Division

Okay. Switching gears to International, do you get the sense here that we might begin to see a rebound in International sales given that the bank sales channel has likely bottomed here?

Edward P. Baird

Let me break that down into a couple of pieces for your. The Life Planner sales, as you know, have continued to grow very steadily throughout this period. Getting growth in the low-double digits in spite of the fact that you get a lower growth rate on the headcount, that's been a trend that's been going on for some years now and I have no reason to believe there'll be a shift there. The trend on the Life Consultant is exactly as we just reviewed. What we're seeing is a flat to, in this quarter, slight drop in sales, but that's the result of a significant drop in the headcount that's being offset partially, in some cases fully, by a steady improvement in productivity. We'll see that trend stabilize. And at some point, I would be hopeful that we will experience exactly what we experienced with Kyoei, which has been stable, higher producing, therefore a higher-profit producing distribution system in Life Consultant. So those 2 trends, I think, are fairly stable and somewhat predictable. The bank channel is the one that's unpredictable. I think we'll continue to experience volatility there as an ongoing feature because we're not targeting revenue growth there, we're targeting bottom line growth. And that distribution system is more susceptible to the -- responding to competitors. So we will continue to do the kind of thing we've done it this past year. Last year, we were comfortable. I mentioned last year -- excuse me, in 2012 we were comfortable with the margins we were getting in the beginning with the single premium. As the competitor actions and the market movements made that less profitable, we then took actions to correct that. We're quite willing to absorb the reduction in sales in order to preserve our profitability.

Operator

Our next question comes from the line of Seth Weiss with Bank of America.

Seth Weiss - BofA Merrill Lynch, Research Division

Last quarter, you commented that capital planning will be part of the supervisory process with the Fed. In that light, could you just describe what conversation, if any, you had with the Federal Reserve prior to executing the share repurchase this quarter?

John Robert Strangfeld

We're not going to comment on any Prudential-specific regulatory conversations or issues. Again, we've commented numerous times on our general views on capital regime and the kind of issues we think are important and I'm happy to talk about that, but we're not going to comment on our specific relationship with the Fed.

Operator

And we have time for one final question and that will be from the line of Erik Bass with Citigroup.

Erik James Bass - Citigroup Inc, Research Division

With the pension closeouts, have you seen the pipeline increase as plan funded statuses improved? And I guess related to that, what do you think may be the biggest factor holding back more jumbo transactions from occurring right now?

Charles Frederick Lowrey

Erik, this is Charlie. I think I would divide the market into 3 parts. And the first part is really 0 to $2 billion. And there, that's kind of the cash market. And we've seen that increase slightly over the past year. Now that's a very competitive market; there are lots of people who play in that market. But we've seen slightly more transactions than we have in the past in 2013, and we have no reason to think that, that will slow down. The second part will be sort of the $2 billion to $4 billion range, so that's what we call the mid-cap range, and there's definitely more activity in this range defined as a lot more conversations taking place with clients and a lot more consultant activity. This is more -- it could be a cash market, it could be an in-kind market, but there are a limited number of competitors in this market or a more limited number of competitors. But there are more conversations taking place. And then you have the jumbo market, which we would define as $4 billion and up. And we're having a lot of conversations there. I'd say, in many ways, the same conversations we've been having for the past 1 year, 1.5 years with a variety of different clients. But as you correctly point out, with funding ratios having increased substantially this past year -- average funding ratios for corporations are now somewhere in the 90s -- the intensity and specificity of some of those conversations have gotten higher or have increased. So again, these will be episodic there. They take a long time to do. To your point, there are a lot of constituencies that have to agree to this, so it has to go through HR, it has to go through the board, it has go through senior management. So they're a long time in planning. They also take time in planning in terms of repositioning of the portfolios. But there are transactions, which we are talking to a variety of planned sponsors about and they will be episodic but we think over time, some of them will occur.

Erik James Bass - Citigroup Inc, Research Division

Okay. That's helpful color. And maybe just if I could just ask one more on just the International business. I guess, how do you think about your current businesses and strategies in faster growth international markets? You would, I guess, have to include Brazil and Malaysia? And kind of what's your strategy for investing in these businesses and when do you believe they could become a meaningful contributor to results?

Edward P. Baird

Let me break that down for you into a couple of timeframes. We continue to have tremendous growth out of our existing businesses as we just reviewed, in particular, Japan, and secondarily would be Korea. If you look out more in the medium term, I'd bring up as an example, Brazil, which you mentioned. So let me provide you a little bit of specifics there. In fact, of the -- if you look at the chart, of the $14 million in growth year-over-year, that came out of the Other countries, $10 million of that $14 million came out of Brazil. And in sales I'm talking about, excuse me. I'll focus on sales and then we'll talk a little bit about profitability after that, because sales obviously, are the primary leading indicator of this. So that puts them up quarter-over-quarter almost 60%. And that quarter is not an anomaly. Brazil, for the year, is up around 60%. What's particularly encouraging about that is it's coming from all 3 of the healthy drivers, so the headcount is up around 35% and the rest of that growth is attributed to average premium and productivity. So last year, we saw a growth of roughly from 600 to almost 800 in the number of life planners. They have now broken into that range where they're covering their fixed costs and they're now starting to produce a small profit. So in the immediate future, I would not see them materially contributing to AOI. But if you extrapolate out into sort of a mid-range term, in the 3 to 5 year, I can see them starting to be a material contributor to the profitability. And I think that is the kind of growth that will be sustainable for a very long time. It's an enormous market with tremendous intrinsic secular growth that's available to it and we have an extraordinary position in that marketplace. And then in the long term would be markets like the Malaysia one that we pointed out to you, places like China and India, but I would position them to be somewhat further out on the spectrum. But what it gives us and what our plan is, is to have a steady sort of 3-staged growth where we get the profit coming out of our significant mature markets, we get some kicking in, in that midterm range and then others that hold potential, more in mid-term, long-term future. That's the strategy that we employ as we look at the markets.

Operator

And ladies and gentlemen, today's conference call will be available for replay after 1:30 p.m. until midnight, February 13. You may access the AT&T teleconference replay system by dialing (800) 475-6701 and entering the access code of 314706. International participants may dial (320) 365-3844. That does conclude your conference call for today. You may now disconnect.

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